California Governor Newsom Closes Montana LLC Tax Loophole for Luxury Vehicle Purchases

SACRAMENTO, CA – Governor Gavin Newsom signed Senate Bill 1406 into law on September 30, effectively closing a long-standing tax loophole that allowed California residents to avoid sales and use taxes on luxury vehicles by registering them through shell companies in Montana. The legislation, which took effect immediately, aims to restore fairness to the state's tax system and recover millions in lost revenue.

The practice, widely known as the “Montana loophole,” leveraged Montana’s absence of a statewide sales tax on vehicle purchases and its accommodating regulations for forming limited liability companies (LLCs). California residents would establish an LLC in Montana, title an expensive vehicle through that entity, and register the car in Montana, even though the vehicle would primarily be used and garaged in California. This strategy allowed owners of high-value vehicles, such as Ferraris and Lamborghinis, to bypass significant California sales and use tax obligations, which can amount to tens of thousands of dollars on a single luxury purchase.

For small and mid-sized business owners, the closure of this loophole underscores the critical importance of adhering to state tax regulations and understanding the nuances of residency and business formation. While such schemes might appear to offer immediate savings, the long-term risks, including audits, penalties, and reputational damage, far outweigh any perceived benefit. We have consistently advised our clients against aggressive tax avoidance strategies that rely on jurisdictional arbitrage without genuine economic substance. Our view is that a proactive approach to tax preparation and compliance, ensuring all state and federal obligations are met, is not only legally sound but also provides greater financial stability and peace of mind. Businesses operating across state lines, or those with complex asset ownership structures, must ensure their arrangements stand up to scrutiny. C&S Finance Group LLC helps clients navigate these intricate tax landscapes, and we encourage anyone with questions about their tax obligations to contact us at csfinancegroup.com to ensure full compliance.

State Sen. Jerry McNerney (D-Pleasanton), who introduced SB 1406 and chairs the Senate Revenue and Taxation Committee, championed the measure, stating that it specifically targets wealthy individuals using “phony shell companies” to evade California sales taxes. He emphasized that closing the loophole would help the state recover up to $20 million annually, funds earmarked for essential services like road repairs.

The California Department of Tax and Fee Administration estimates that at least 2,500 vehicle sales involving California residents have utilized the Montana setup since 2023, collectively costing the state approximately $20 million in tax revenue each year. The issue gained widespread public attention after a $600,000 Lamborghini owner publicly boasted online about evading an estimated $70,000 in California taxes through this very mechanism.

SB 1406 expands California’s definition of what constitutes a resident for sales and use tax purposes. The new law makes it significantly harder for individuals to avoid taxes by establishing out-of-state shell companies. Crucially, it clarifies that a company becomes liable for California state taxes when at least one member of the business is a California resident, thereby expanding the criteria for determining when a shell company is effectively a California resident for tax purposes.

Prior to the law’s passage, authorities had already begun to crack down on the practice. Earlier this year, investigations were initiated into 14 Californians accused of failing to report over $20 million in luxury vehicle purchases, allegedly avoiding more than $1.8 million in taxes. The legislative action solidifies the state’s commitment to enforcing tax equity and preventing such evasive maneuvers.

The passage of SB 1406 by a significant margin—59-19 in the Assembly and 31-8 in the Senate—reflects a broad consensus within the state legislature to address this long-standing issue. With the new law now in effect, luxury car owners in California can no longer rely on the Montana LLC strategy to circumvent sales and use tax obligations. The state is expected to rigorously enforce these expanded residency rules, sending a clear message about tax compliance for high-value assets.